Interest Rates and Bankruptcy Reform

Anyone else remember the arguments being made by the credit card industry that abusive bankruptcy filings were forcing up interst costs? Bankruptcies under the old law were supposed to be costing everyone of us $400 a year in excess interest charges. We had to pass the Bankruptcy reform bill to stop that.

So. You got your $400 in savings yet? Neither have I.

In fact, credit card interest rates are SOARING. USAToday is reporting that more and more people who have never missed a payment are having their interest rates hiked to 27, 28% or more. Why? Well, one credit card company allegedly admitted to a customer that it was because they could. Doesn’t that make you feel all warm and fuzzy.

A more complicated reason is that it all has to do with securitization. You know, that whole structured finance mess that is causing so much grief in the world’s financial markets. You know, that stuff that is all about sub-prime mortgages? Yea, well, its about credit cards too. Oh, and car loans; but that is another post.

You see, credit card companies use credit card accounts, with their resulting cash flow, to securitize bonds. Just like gets done with mortgages. Another thing that is just like with mortgages is that any increases in fees or interest may not be required to be passed on the investors. The servicing lender may be able to pocket that. Banks deny that this has anything to do with it, of course. After all, this might create a conflict of interest between the servicer and the ultimate investor — especially since bankruptcy filings are heading back up.

Let’s see. Bankruptcy reform was passed to stop losses to lenders from people who filed for bankruptcy. So, lenders securitize debt in such a way that it makes sense for them to up interest rates which the borrowers now can’t afford to pay forcing more people into bankruptcy.

Something tells me I won’t be seeing that $400 in interest savings this year either